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October 25, 2013

Companies’ 401(k) Match Gets a Critical Change

Employers that suspended the match during the recession are restoring it with retirement readiness in mind

The 401(k) match is making a comeback, though in a slightly different, and very important, form.

A recent Transamerica survey on retirement trends found that half of the companies that had cut or suspended their match during the recession were reinstating it.

Kathleen Connelly, executive vice president of client services at Dresher, Pa.-based Ascensus, said her firm began to notice that plan sponsors had stopped eliminating or reducing their matching contributions as far back as 18 months ago.

The more important trend, Connelly said, isn’t so much that the match is back, but that it is being restored with employee retirement readiness in mind.

Plan sponsors aren’t simply offering 50 cents on the dollar up to a certain low amount, as was the practice before the recession began. Instead, they are changing their match structures, in a fundamental way, to encourage participants to put away more money, Connelly said. “We’re seeing new designs to help participant readiness down the line,” she said.

What that means is that instead of offering employees a 50% match on up to 6% of their retirement plan contribution, they might now offer a 25% match on up to 12% of a participant’s deferral.

“Mathematically, it is equivalent (for the employer),” acknowledged Patricia Advaney, chief marketing officer for Transamerica Retirement Solutions. But it makes a big difference in how much savers save.

The goal is to help participants get to the 10% to 15% they need to put away each year to generate enough income in retirement to live comfortably, or, shall we say, less uncomfortably, given today’s trends.

The trend is being driven by the growing industywide emphasis on plan design. That effort has included automatic enrollment, automatic escalation and other new options to help employees better prepare for retirement.

“I don’t think anyone is going to say the decline in the economy was a good thing, but coming out on the other side of it, we are seeing more thoughtful plan design to help participants reach that ultimate goal,” Connelly said.

And, again, changing the match doesn’t have to cost the company anything.

Connelly said her clients, who are on the smaller end of the market, tend to adjust their matching levels up once employees become vested in their retirement accounts. Most plan sponsors don’t make bigger design changes unless they are changing record-keepers.

Jim Danaher, managing director of defined contribution solutions at Northern Trust, which serves typically larger employers, said the match is important but not always as critical as some might believe.

“I wouldn’t say that the absence of a match would discourage someone from staying in a plan,” he said. “If it is a situation where enrollment is voluntary, that’s a slightly different case. (But) I think if you have individuals auto-enrolled, the absence of a match is less of a driver for participation.”

“Despite widespread news reports to the contrary, most plan sponsors did not make changes to the match during the recession. In 2013, among the 15% of companies who said they had decreased or suspended their match during the recession, nearly half (7%) said that they have reinstated it,” the Transamerica center said in its study.

Advaney’s biggest takeaway from the report was that “employers are thinking about their level of responsibility as it relates to their retirement plan, and they are thinking about what they can do to make it as attractive as it can be.”

Large corporations, in particular, used to offer these types of options as a way to attract and retain good employees. Now, for the first time this year, “helping employees accumulate for retirement edged out the next highest reason for having a plan,” Advaney said.

In other words, companies are even more concerned about helping their employees prepare for retirement than they are with attracting top talent.

Defined contribution plans were viewed as supplemental savings vehicles and matching contributions were just an added benefit, Advaney said. Now, DC plans are seen as essential retirement vehicles for the majority of working Americans.

Plan sponsors should design their matching contribution in such a way that employees don’t feel that they are taking money out of their pocket, especially if they can’t afford to save more, she said.

Different formulas could be used to make sure that doesn’t happen.

“I haven’t seen a lot of people take us up on that, but it is making some people think. To modernize their plan to make sure everything is pointing in the right direction so participants, whether they auto-enroll or not, are making the right decisions in spite of themselves.”